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What the world could learn from China’s edtech crackdown

Written by Rahul Maheshwari Published on     4 mins read

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As pandemic has amplified online education, emerging economies like India and Southeast Asia are seeing significant uptake in after-school tutoring.

For Chinese K-12 edtech companies that’ve listed in the US, the last few weeks has seen a flurry of investment liquidation in the market. The cause of the turbulence is the Chinese government’s proposed reforms of the K-12 education market, ostensibly to address the pressure on students that mostly resulted from excessive after-school tutoring.

Stocks of major Chinese edtech companies listed in the US; investors have been rushing to liquidate their positions.

Propelled by a student population of over 240 million between the age of three and 18 years, China’s K-12 edtech market, pegged at USD 31 billion, is the world’s largest. The size of the market combined with Chinese parents’ high willingness to pay have driven investor interest in the sector, with funding in 2020 alone reached over several billion US dollars.

At the same time, the wider edtech industry has had to wade through regulatory turbulence, as Beijing consolidates its policies to keep the industry in check. Under its 14th Five Year Plan for 2021 to 2025, China aims to strengthen school education through reducing educational burden on students and improving quality of school teaching. According to reported official discussions, the government intends to regulate the management of off-campus training institutions, as well as thoroughly investigating and severely dealing with institutions on matters such as unqualified faculty and undue profiteering, including through collusion with schools.

Gross billings of online K-12 after-school tutoring market (China), 2015-2024E (Source: Frost & Sullivan Report)

Chinese regulators have proposed a slew of regulatory measures such as disallowing long-term payment plans, keeping a check on misleading ads, especially those with a potential to affect mental well-being of students and parents. It also wants to limit the excessive growth of after-school tutoring centers and tighten the approval of coursework and faculty, to ensure only qualified professionals teach online. To ease the academic pressure on students, it wants to put restrictions on hours of after-school training and disallow students under 4–5 years from signing up for after-school courses.

The coming weeks are expected to provide a greater clarity on the final set of reforms. However, this has not stopped speculations of widespread layoffs in top companies like GSX, ByteDance, and Youdao.

Since last year, China’s tech industry has been subjected to several crackdowns. Alibaba, China’s largest e-commerce company valued at over USD 700 billion, was fined USD 2.8 billion in April 2021 for its monopolistic behaviors. In January 2021, regulators from the Shanghai Stock Exchange suspended Ant Group’s USD 30 billion IPO. Tencent, one of the largest technology companies in China that operates the country’s dominating social media platform WeChat, has also been warned by regulators to ensure strict compliance with anti-monopoly laws and consider overhauling its fintech division. Most recently, in the past May, Yuanfudao and Zuoyebang—China-based edtech unicorns specialized in after-school tutoring—were fined USD 400,000 each, for false advertising and misleading campaigns.

One of the suggested reasons for the strict clampdown is the latest national census data, which has revealed some pressing issues for the policymakers.

In 2020, China reported a birth rate of 11.4 per 1,000 people, a 2.2% decline from 2019. This indicates that the average age of the population in China is increasing, which has hampered the country’s labor force. One of the reasons the younger population does not want to get married or have children is because of the pressure on raising kids in recent times.

By regulating the education sector, and the edtech industry in particular, the government appears to have attempted a reduction in the pressure on parents and children, so that they can also persuade the youth of the country to not shy away from having families.

As the pandemic has amplified online education, emerging economies like India and the Southeast Asia are also seeing significant uptake in after-school tutoring, leading to multi-billion US dollars raised in VC funding annually in those regions. Edtech players in India would be better off watching their Chinese counterparts, owing to certain common factors between the markets, including pressure on students, and population size.

What can policymakers learn here?

  • While the traditional schooling system is subject to reforms from time to time, online education has largely been a free zone with low entry barriers. Anyone can start and run an online education platform. Platforms have been found wanting in terms of teacher qualification mostly because they hire in a hasty manner that does away with a thorough background check process. Addressing these concerns could mean setting up an authority to set down the minimum qualification for teachers—bachelors in education as a close example—in addition to setting licensing regime akin to a board affiliation in traditional schooling system, and issue licenses to teachers who can conduct after-school tutoring.
  • Regulation of advertisement in the edtech space is another concern to ensure ads are not deceptive or misleading.
  • Access to after-school tutoring may be limited to wealthier families, furthering the socio-economic divide. There might be a need for intervention in how the courses are being priced, along with the content of the courses.
Advertisements above seem to be borderline deceiving.

Going forward, edtech companies and investors should be mindful of investing capital and effort in bridging the access gap, and making online education cost-effective. This will not just bring value to the companies, but also to the society (students, parents), and set the economy for success.

Rahul Maheshwari is an early stage VC at BEENEXT, with a focus on emerging markets. He has previously worked in the consumer internet space between China, India, and Souteast Asia. He regularly writes about Chinese tech industry in his blog Oldrope.

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